US: Business Inventories

Wed Apr 13 09:00:00 CDT 2016

Consensus Consensus Range Actual Previous Revised
Inventories - M/M change -0.1% -0.2% to 0.2% -0.1% 0.1% -0.1%

Sales are falling but fortunately so are inventories which fell 0.1 percent in February vs a 0.4 percent decline for sales. The combination keeps the inventory-to-sales ratio, which has been trending higher, at 1.41.

Retail inventories rose a very steep 0.6 percent in February especially against a 0.2 percent decline for sales. Retail inventories of autos, where sales have been weak, rose 1.3 percent in the month to swell the inventory-to-sales ratio to 2.14 from 2.12. Inventories at both manufacturers and wholesalers fell in the month to keep ratios for these readings stable.

Retail inventories, given this morning's weak retail sales report for March, may be a risk to the nation's inventory outlook, especially for autos where inventory backup also points to trouble for factory production. Lower down the supply chain, however, sales and inventories are balanced, at least for now.

Market Consensus Before Announcement
Business inventories have been flat but not flat enough relative to sales which have been on the decline. The stock-to-sales ratio, at 1.40 in January, was the heaviest since 2009. Unwanted inventories are negatives for the production and employment outlooks. The consensus forecast is calling for a 0.1 percent dip for business inventories in February.

Business inventories are the dollar amount of inventories held by manufacturers, wholesalers, and retailers. The level of inventories in relation to sales is an important indicator of the near-term direction of production activity. (Bureau of the Census)

Investors need to monitor the economy closely because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more moderate growth that won't generate inflationary pressures.

Rising inventories can be an indication of business optimism that sales will be growing in the coming months. By looking at the ratio of inventories to sales, investors can see whether production demands will expand or contract in the near future. For example, if inventory growth lags sales growth, then manufacturers will have to boost production lest commodity shortages occur. On the other hand, if unintended inventory accumulation occurs (that is, sales do not meet expectations), then production will probably have to slow while those inventories are worked down. In this manner, the business inventory data provide a valuable forward-looking tool for tracking the economy.